Tax structuring - Using a UK company as agent for an offshore company
British companies are popular for many reasons, but one of the main advantages, especially for individuals abroad, is the degree of respectability and professionalism they convey. This is particularly the case as clients may not wish to contract directly with an offshore company. It may also be mandatory for some service providers in the UK to use a UK company.
A UK company would pay UK income tax of 18%.
There are no special forms of UK company targeted at non-residents so if you were a non-resident for example and wanted to use a UK company without incurring corporate tax charges, you could consider an agency/applicant scenario.
How it works
The British company as an agent of an offshore company. This is governed by the agency feewith the UK company as agent and the offshore company as principal.
If you are the agent of another party, this means that you are authorised to carry out transactions on its behalf and can receive rental income and hold assets, in your own name but in circumstances where the full benefit accrues to the other party and to any business the UK company conducts is solely in the name of the offshore company.
So, in simple terms, you run your business through an offshore company, but use a UK company as a form of nominee, with most of the income going to the 'principal' (which would be an offshore company).
This is popular when you have any form of export.
For example, the UK company is incorporated as a sales agent for an offshore company. The UK company handles invoice/receipts etc. and deducts a commission at market rate (for example 5%).
The remainder of the profits are paid back to the offshore company and the taxable profits in the United Kingdom would only be the commission of 5%.
In this case, the offshore company is the "principal" and the UK company is the agent.
The UK company would sign a contractually binding agency agreement with the offshore company which explains the terms of the agency operation.
The main problems with the UK tax are to guarantee commercial agency fees and to avoid any problems of permanent establishment. You need to ensure that the fees charged by the UK company are set at a commercial rate for the services provided.
Amounts received and paid by the UK company are not for its own account and are for the account of the offshore company (i.e. it is not the UK company's money). Therefore, it usually transfers the funds to the offshore company with a reconciliation statement showing the amounts received, paid and commission withheld. There would also be an invoice for commission charges of 5%.
There are many occasions when a British agency could be useful: -
The UK company can be used for invoicing purposes, where it could, for example, supply goods on behalf of an offshore company, receive payment into a bank account in its name and account for the money to the offshore company. This is probably the main use as it avoids any permanent establishment problems for the offshore company. The UK company simply collects money on behalf of the offshore company.
The UK company could be used to provide services to clients on behalf of an offshore company where clients would not want to deal directly with the offshore company.
Property Management in the United Kingdom
The UK company could act as management agent for the collection of rental income on behalf of an offshore company (which would own the property) and the offshore company would charge a commercial fee. Tenants would not know that they were dealing with an offshore company, capital gains and rental income would be tax exempt in the hands of the offshore company.
Candidate ownership in the United Kingdom
The UK company could be used to own the property (on paper) in the name of an offshore company, with the offshore company still being entitled to all the uses and benefits of the property, including rents and proceeds of sale in due course. The UK company is the applicant and the offshore company is the beneficiary. A commercial fee should be charged to the offshore company.
The Isle of Man is popular, as are traditional tax havens such as the BVI, Panama and the Seychelles. Any tax-exempt jurisdiction could be used. Establishing the offshore company in a jurisdiction that had a tax treaty with the UK would in most cases result in no tax benefits.
Market rate commission
It is essential that the UK and the offshore company operate on an arm's length basis. This means that the rate that the UK company charges the offshore company should be based on the market rate for the services provided.
There are strict transfer pricing regulations that can have an impact on this.
Therefore, you need to evaluate the services provided by the UK company and see what rate an independent third party company would charge for these services. In the case of a simple re-invoicing company, this could be 5% of revenue. If the UK company undertakes additional activities, then this would be increased.
It is important to ensure that you can support the fact that there is a genuine agency relationship. Therefore, make sure that a legally binding agency agreement is drawn up by a lawyer.
You will usually want to ensure that the beneficial title to the goods purchased is overseas so that the UK company is not treated as making a profit in its own name. The UK company can hold legal title provided that the offshore company clearly holds the beneficial interest.
In most cases, there will be no offshore tax burden for the offshore company as it will be classified as a trading company outside the jurisdiction of incorporation.
Avoiding a tax burden in the United Kingdom
It would be essential to ensure that the UK company does not constitute a permanent establishment of the offshore company and thus carry on business in the UK. If this were the case, the profits of that permanent establishment could be taxed in the UK.
You must therefore be able to establish that the actual trade was carried out by the offshore company abroad and that the activities of the UK company did not constitute UK business activities on its behalf. One of the problems will be the location where the contracts are signed. However, even where contracts are concluded abroad, this fact is not conclusive against the UK trade by the UK company. Trade will be carried on in the United Kingdom if there is significant economic activity in the United Kingdom which contributes to generating profits.
In practice, there would be a tax burden in the UK only if there is a permanent establishment in the UK by the UK company.
There are two main circumstances in which there may be a permanent establishment. These are:
- Where there is a fixed establishment through which the activities of an undertaking are carried on in whole or in part
- Where an agent, other than an independent agent, acting on behalf of the corporation has entered into and habitually exercises contracts on behalf of the corporation
The main concern will be whether there is a "dependent" agent in the United Kingdom, as this may constitute a permanent establishment in certain circumstances.
The OECD notes that one of the ways in which a permanent establishment of an enterprise could be established is where an agent acting on behalf of the enterprise has, and habitually exercises, in the United Kingdom the power to conclude contracts in the name of the enterprise.
Anyone who can establish a permanent establishment for the enterprise is known as a dependent agent and can be an employee or a self-employed person (and a natural or legal person). The OECD notes that only persons authorized to enter into contracts can lead to a permanent establishment for the enterprise.
If there were a permanent establishment, UK income attributable to the permanent establishment would be subject to UK tax.
It would therefore be important to establish that the British company was not not in able to enter into contracts on behalf of the UK company, particularly with regard to commercial transactions. If this were the case, the income could be taxed on the offshore company in the UK.
If the offshore company is not a subsidiary of a UK company, the controlled foreign company rules would not apply. However, if the offshore company was directly owned by a person resident in the UK or if that person had the power to enjoy the income of that company, the UK income tax anti-avoidance rules would have to be taken into account (see "Setting up central management and control abroad"). )
Treatment of income received in the statutory accounts
One of the great advantages of using an agency structure is that the UK company would not be taxed on all the income it received on behalf of an offshore principal, but would only be taxed on its commission receipts.
As regards the accounts of the UK company, it would be essential to determine whether, for accounting purposes, it acted as principal or agent.
This would then have an impact on whether only the commission was reported as turnover, or whether the total income and expenses were reported in the accounts. In the latter case, the risk of an HMRevenueCustoms investigation is clearly higher.
UK reporting standards stipulate that for a company to be considered a principal, it must normally be exposed to all significant benefits and risks associated with at least one of the following:
- Sales price means the ability, within economic constraints, to determine the sales price with the customer, either directly or, where the sales price of an item is fixed, indirectly by providing additional goods or services or by adjusting the terms of a related transaction; or
- Stock: exposure to the risks of deterioration, slower movements and obsolescence and of changes in supplier prices.
Where the seller has not disclosed that he is acting as agent, there is a rebuttable presumption that he is acting as principal.
Other factors that indicate that a vendor may act as principal include:
- performance of part of the services or modification of the goods supplied;
- assumption of credit risk; and
- discretion in the selection of suppliers.
On the other hand, when a seller acts as an agent, he will not normally be exposed to the majority of the benefits and risks associated with the transaction. Agency arrangements typically include the following features:
- the seller revealed the fact that he was acting as an agent;
- Once the seller has confirmed its customer's order with a third party, the seller will normally no longer have any involvement in the performance of the end supplier's contractual obligations;
- the amount the seller earns is predetermined, either a fixed amount per transaction or a stated percentage of the amount charged to the customer; and
- the seller does not bear any inventory or credit risk, except in cases where it receives additional consideration from the end supplier in return for assuming this risk.
As indicated above, the distinction between agent and principal in the accounts is crucial because when the substance of a transaction is that the company acts as an agent, it must report as turnover in the accounts the commission received in exchange for its performance under the agency agreement.
Any amount received payable to the foreign principal would not be included in the agent's turnover.
You must therefore determine whether the UK company can be classified as an agent for accounting purposes.
As stated above, you will need to examine the substance of the transaction and there is a rebuttable presumption that if there is no disclosure of the principal, the UK company would be the principal (and therefore report all turnover and subsequent payments to the offshore). company).
If you were using the UK company as a front for the offshore company, there would probably be no disclosure of the agency agreement. In this case, however, if you can argue that, based on the other factors, the nature of the agreement is that the UK company is an agent, this should be sufficient.
Use of a Limited Liability Partnership (LLP)
The alternative option would be to use an LLP. This is a flow-through entity for UK tax purposes and therefore the income would be allocated to you personally.
Provided the profits are not profits from a UK business and you are not resident in the UK, there would be no UK income tax charge on the profits. This therefore has an advantage over UK Ltd above in that it can avoid all UK taxes while maintaining the professionalism and credibility of a UK entity.
On disclosure, the notes to the Partnership Report state that "... Where all the partners are not resident in the United Kingdom, the partnership tax return should show only profits from UK operations...".
Therefore, if the partnership had no commercial benefit in the United Kingdom, the return on the partnership would in fact be blank.
The disadvantage of an LLP is that it would have to file accounts with the House of Lords showing its profit and loss account and balance sheet, even though it may operate abroad.